Total capital dedicated to the global reinsurance industry was US$587 billion as of June 30, reflecting a 3% decline since year-end 2019, according to Willis Re’s latest Reinsurance Market Report.
The half-year figure masks a tumble of nearly 30% up to late March following the impact of the COVID-19 pandemic on investment markets. That deficit was largely restored in subsequent months, Willis Re said.
“Total capital remains 12% higher than at the end of 2018, suggesting that, based on current investment market levels, COVID-19 has not been a capital event for the industry,” the company said.
Willis Re also conducted a more in-depth analysis of a subset of 18 reinsurers. The subset’s combined ratio worsened from 94.9% in the first half of 2019 to 104.1% in H1 2020 due to COVID-19 losses, which added 11.1 percentage points to combined ratios on average. However, on an underlying basis (normalising COVID-19 and catastrophe losses and excluding prior-year reserve development), the combined ratio improved from 100.5% to 98.6%.
Underlying underwriting performance improved, but not enough to boost return on equity (RoE). While the reported RoE for subset companies fell to negative 0.7%, the underlying RoE also fell from 4.2% in H1 2019 to 2.7%, Willis Re reported. The main driver was a drop in investment yield, which more than offset the improved underlying combined ratios.
“This half-year analysis shows a reinsurance market understandably in a state of change,” said James Kent, global CEO of Willis Re. “While reinsurers have so far resiliently shouldered the combined effects of COVID-19 losses and investment market volatility, underlying profitability remains challenging. Uncertainty therefore remains, particularly over the potential impact of COVID-19 on long-tail lines, which is driving reinsurers to deliver additional improvement in underwriting returns. We expect to see further reinsurance market discipline as well as continued differentiation between regions and clients based on past performance and underlying risk.”